October 22, 2014
October 21, 2014
October 20, 2014
Indiana Court Applies Corporate Alter Ego Doctrine
The corporate alter ego doctrine is a device employed by courts when two companies are so closely related that one should be liable for the actions of the other. The doctrine was recently invoked in Konrad Motor and Welder Service, Inc. v. Magnetech Industrial Services, 973 N.E.2d 1158 (Ind. Ct. App. 2012). The Court of Appeals affirmed a trial court judgment holding Konrad Motor & Welder Service (“Konrad MWS”) liable for an obligation of Konrad Electric, Inc.
Konrad Electric was formed in August 1991. Sharon Lambrecht was the sole officer and shareholder. Her husband, Konrad, was employed as the general manager of Konrad Electric, which provided welding services for a dozen customers including Magnetech, a company with which Konrad Electric had a long relationship. Before it suspended operations in 2008, Konrad Electric did not conduct director or shareholder meetings. A corporate record book was maintained, but there were consents in lieu of minutes for only three years.
In May 2004, Jupiter Aluminum hired Konrad Electric to repair two large motors. Part of the work was subcontracted to Magnetech. Jupiter sued Konrad Electric, which filed a third-party complaint against Magnetech. In early 2006, Konrad Electric stopped accepting new work and the Lambrechts formed Konrad MWS. Konrad was the sole officer, director, and shareholder of the new corporation, which shared an office with Konrad Electric and used the same equipment. Konrad MWS eventually moved to a new location in 2009. Its business was the same as Konrad Electric, and the new company served the same customer base.
Magnetech recovered a judgment against Konrad Electric in December 2008, and then filed a third-party complaint against Konrad MWS and the Lambrechts under the theories of alter ego and piercing the corporate veil. The trial court entered a summary judgment piercing the corporate veil of Konrad Electric, holding the Lambrechts personally liable for the judgment. The trial court further determined that Konrad MWS was the alter ego of Konrad Electric and was also liable for the judgment. The Court of Appeals reversed as to the Lambrechts because the evidence record was inconclusive on key issues, and on summary judgment any doubts or inferences needed to be resolved in favor of the Lambrechts. The judgment against Konrad MWS was affirmed based on application of numerous factors considered by Indiana courts when applying the alter ego doctrine. The Court concluded that “Konrad Electric tried to avoid paying the judgment to Magnetech while still conducting the same business under a new name.”
The case shows the importance of the corporate structure and the need to observe corporate formalities, to avoid costly litigation.